Despite a price increase of 9 per cent over this year, HBOS predicted that house-price inflation would ease to 4 per cent in 2007 as interest rates started to bite.

The slowdown would be felt more keenly in the North of England, where price rises would continue to lag behind the rest of the country.

The predictions coincided with a separate report from the Department of Communities and Local Government showing that average house prices dipped between September and October.

Despite the blip, property values rose by 8.6 per cent over the year to October. The fastest rise was in London, at 10.6 per cent, but growth slowed in the North East, Yorkshire and Humber and the West Midlands.

HBOS said that the North-South divide was set to deepen next year, with the gap between house prices in the North and South of England likely to widen by £10,000 to £97,500. Record City bonuses and a shortage of properties for sale would push up prices in London by 8 per cent for the second successive year.

Martin Ellis, chief economist at HBOS, said that a strong economy would continue to underpin the housing market. He predicted that strong price rises in the capital would have a knock-on effect in the South East, where prices would increase by 6 per cent.

Only Northern Ireland would enjoy faster growth, with a rise of 15 per cent — less than half this year’s estimated rise of 34 per cent.

The smallest price rise, of 2 per cent, is expected in the North of England. In Scotland, however, prices should rise by 7 per cent, well above the British average.

A more upbeat forecast from the Royal Institution of Chartered Surveyors (RICS) suggested that a shortage of homes for sale will push up property prices by 7 per cent in 2007. The surveyors said that, although price rises would be more moderate next year, first-time buyers would still struggle to get their foot on the ladder and the number of repossessions was likely to rise.

David Stubbs, the RICS economist, said: “The bleak outlook for first-time buyers looks set to darken further as house prices rise faster than incomes and the Government holds the stamp duty threshold at £125,000.”

However, he did not expect the increasing gloom for first-time buyers to have a significant impact on the housing market. “Demand remains strong, disposable income is growing and buy-to-let investors substitute for first-time buyers at the bottom end of the market,” he said.

Although base rates are expected to rise in the new year and affordability constraints will cool down the market, RICS said that the market was in no danger of a correction.

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